TaxTMI 
TaxTMI 
TaxTMI 
2011 (1) TMI 36
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....he assessee while computing its business income had claimed a deduction on account of a sum of Rs. 2,13,96,720/- towards community development and environment monitoring expenses. The assessee explained before the Assessing Officer the purpose for which these expenses were incurred as follows: Environment Monitoring Expenses: 1) Pollution Control and Monitoring Expenses. 2) Horticulture and Poly houses for exotic variety of Flowers expenses. 3) Use of drip irrigation and water harvesting ponds 4) Maintenance of Lawns & gardens in and around the generation plants. Community Development Expenses: 1) Maintenance of Public gardens with displaying of placards of company name to create a positive image. 2) Providing scholarships to deserving students. 3) Providing educational assistance and supply of books, educational materials etc. 4) Organising Medical camps and providing medical aid. 5) Providing sponsorships, 3. The assessee relied on the decision of the Hon'ble Rajasthan High Court in the case of CIT vs. Kamal & Company., 203 ITR 1038(Raj) and the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Navasari Cotton & Silk Mill Ltd., 135 ITR 546.....
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....7 78 3505&3370/M/06 5. A.Y. 2003-04 7 7 78 3506&3371/M/06 6. A.Y. 2004-05 4 12& 13 84 3951/M/07 7. A.Y. 2005-06 3 8&9 89 4164/M/07 Respectfully following the decision of the Tribunal on identical issue we uphold the order of CIT(A) and dismiss ground No.1 raised by the revenue. 7. Ground No.2 raised by the revenue reads as follows: "On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to allow the expenditure on replacement of meters amounting to Rs. 75,32,88,942/- as revenue expenditure." 8. The assessee claimed as deduction a sum of Rs. 75,32,88,942/- being repair to plant and machinery and debited to P&L account and pertaining to electricity meters replaced during the year. According to the Assessing Officer replacement of electricity meters was a capital expenditure and cannot be allowed as deduction while computing the total income. The assessee explained before the Assessing Officer that it had about 2496000 consumers of electricity in the suburbs of Mumbai and the meters installed had to be periodically replaced on account of obsolescence, meters becoming faulty, burned ....
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....06 3 75 5. A.Y. 2003-04 3506&3371/M/06 3 75 6. A.Y. 2004-05 3951/M/07 17 85 To 86 Respectfully following the decision of the Tribunal we uphold the order of the CIT(A) and dismiss ground No.2 raised by the revenue. 13. Ground No.3 raised by the revenue reads as follows: "On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer not to allocate any head office expenses for the purpose of computing deduction u/s. 80 IA in respect of profits of Goa Unit and Samalkot Unit." 14. The assessee company has claimed deduction u/s. 80 IA in respect of the following units. S.No. Name of Unit Nature of business Amount claimed. 1. Samalkot Power Generation Generation & distribution 60,23,11,654 2. GoaPower Plant -do- 10,44,54,415 3. Dahanu Unit-1 Generation 255,25,33,002 4. Dahanu Unit-2 Generation 234,17,58,239 The assessee was asked to justify its claim for the deduction u/s. 80 IA and the basis for arriving at the profit eligible for deduction under section 80IA. The assessee was further asked to explain why office expenses should not be allocated while considering deduction u/s. 8....
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....sp; Rs. 1,09,08,188 Add: Depreciation as per IT Act Rs. 1,59,95,347 Less: Loss on sale of assets Rs. 6,394 &nb....
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....p; ================== Proportionate HO expenses in relation to turnover is worked out as Turnover of Unit X Total expenses /Total eligible turnover. HO expenses of Goa Unit: 2242471920 X 124,92,70,776 / 4605,75,72,959 = 60,814,149 HO expenses of Samalkot Unit: 2349814874 X 124,92,70,776 / 4605,75,72,959 = 63,725,209 Accordingly head office expenses of Rs. 12,45,39,358/- was allocated in respect of these two units and 80IA deduction was restricted to Rs. 53,85,86,445/ and Rs.4,36,4026/ in respect of Samalkot and Goa Units respectively. 16. On appeal by the assessee the CIT(A) following the orders of the Tribunal in assessee's own case on identical issue in Assessment Year 2002-03 to 2005-06 directed the Assessing Officer to accept the allocation of Head Office expenses as done by....
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....-97 it had put up a plant for generation of electricity at Dahanu. The company was entitled to deduction u/s 80IA in respect of income from generation of electricity at Dahanu. The relevant section reads as follows: [Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. 80-IA. (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years. (2) to (3)....... (4) (i) To (iii) (iv) an undertaking which,- (a) is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March,2011; 21. The....
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....s carried on by the assessee, or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date : Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation.-For the purposes of this sub-section, "market value", in relation to any goods or services, means the price that such goods or services would ordinarily fetch in the open market. 22. In working out the price paid to TPC by the company, the Assessi....
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....egulations, it was mandatory for all power generation and distribution entities to apply for fixation of tariff ultimately to be charged to various consumers. MERC had, for the first time issued a tariff order on1st July 2004which is applicable for financial year 2004-05. Similar for FY 05-06, applicable for AY 06-07, MERC has fixed tariffs vide its order dated3/10/2006. The tariffs are fixed based on two concepts viz., clear profits and reasonable return. A reasonable rate of return is fixed on the capital base. There are principles for determination of capital base. Clear profits are determined by considering the income for sale of electricity, non tariff income and deduction expenses, income tax and allowing some funds for contingency. If the clear profits are more than the reasonable rate of return, then the excess is considered while fixing tariffs for the subsequent year. This exercise of adjusting gap between the reasonable return and clear profits is an on going process and the same is either allowed to be recovered from the consumers out of fixation of tariff for subsequent year or the tariff for the subsequent year is adjusted to take care of the excess gap. 24. MERC in i....
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....turn as given in MERC order are in respect of the combined activity of generation and distribution and the same are not for the generation activity alone. The Assessee pointed that the same would be evident from the item of expenditure which shows "power purchase". The power purchase is from Tata Power Companies (TPC) which was used for distribution of electricity to comsuners in licensed areas. The tariff determination by MERC is for the ultimate price to be charged by the assessee to different type of consumers. Thus MERC order determines the price for activity of distribution of electricity which is either generated or purchased. Therefore, the profits determined by MERC are not for generation alone but generation and distribution as well purchase and distribution. The combined profits have to be bifurcated between generation activity and distribution activity - distribution of self generated as well as purchased power for the purpose of computing deduction u/s. 80IA. It was submitted that it was at this juncture, the bifurcation of total profits into various segments have to be carried out. The assessee bifurcated its Profit and Loss Account into various divisions, as under: &n....
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....ooks of accounts. ii) Profits as computed by MERC i.e. Clear Profit iii) Reasonable Return. The Tariff fixation if done prior to the end of the year will take into account the estimate of revenue and expenditure and will not match the actual. In such an even there will be difference between the actual and the Clear Profits worked out by MERC. There will again be a difference between the Clear Profits and Reasonable Return. Difference between Clear Profit and Reasonable Return are adjusted on a rolling manner in subsequent Tariff. Thus on a year to year basis the Reasonable Return will never be same as the Clear Profits or the Profits as per books of accounts, though the difference is always adjusted in a rolling manner as stated above. Thus the Reasonable Return which is computed based on hypothetical figure of Capital Base which is also adjusted on a year to year basis and having no reference to the actuals in the books of accounts is only an exercise for fixation of tariff. However, the actual profit earned which are liable to tax have to be as per the books of accounts and based on the same profits as computed in the books of accounts the deduction u/s. 80 IA has to be c....
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....ow the purchase price and the fact that Tata Power Corporation has claimed deduction u/s. 80IA of Rs.37.47 crore on its Trombay unit 7 Power Plant with installed capacity of 180 MW on the basis of reasonable return and deduction as per same rate for Dahanu Power Plants for 500 MW installed capacity would come to almost same amount, the deduction u/s. 80IA of Rs.110 crore in respect of Dahanu Units is reasonable." 27. Before CIT(A) it was submitted that proviso to sec. 80IA(8) can be applied only when computation of profits and gains of the eligible business. In the manner specified in sec. 80IA(8) presents exceptional difficulties. He pleaded that section 80IA(8) required the Assessing Officer to adopt the value of goods transferred from eligible business to non eligible business. There was no exceptional difficulties in computing the market value of goods in the assessee's case. He further pointed out that indication of the market price of power is readily available as the assessee has also purchased power from TPC. So the rate at which the assessee has purchased power from TPC canbe taken as the market price of the goods generated by the assessee. He made a mention here that the....
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....o the next cycle of tariff fixation. If the clear profit i.e. actual profit as per books is more than the reasonable rate of return the balance is carried over to the next cycle of tariff fixation and tariff is fixed accordingly. So between the two, the correct basis is to adopt the clear profit and not the reasonable return. Further, the clear profit as per books of account is required to be adjusted according to the provisions of the Income tax Act i.e. depreciation as per sec. 32, disallowance u/s.40(a)(ia), 43B etc. The Assessing Officer has wrongly adopted the reasonable return which is the figure after tax thereon and statutory appropriations, without making any adjustment as per the Income-tax Act. In doing so the Assessing Officer has ignored the provisions of Income-tax Act in working out the deduction u/s. 80IA. 29. It was further submitted by the assessee that tariff structure is the ultimate price realised from the customer and nothing to do with the value of power generated at the assessee's unit which is transferred to the distribution division. For distribution activity there are two source of power procurement i.e. power generated at Dahanu and power purchased from....
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....icable. The assessee objected to the Assessing Officer's reference to the profitability of TPC in respect of their Trombay unit 7 power plant to justify his allocation of combined profit to generation activity at Rs. 110 cores. The assessee submitted that the Assessing Officer cannot rely on the documents of other persons without confronting the said documents to the assessee. In the absence of such documents the assessee cannot comment on the result of the said company. Taking into the entirety of the facts and earlier orders in the assessee's own case, the assessee submitted that the deduction u/s. 80 IA should be worked out by applying the market rate under sub section (8) of sec. 80 IA to the power generated in the generating unit. 31. On consideration of the above submissions the CIT(A) held that in the assessment of the assessee in the past the revenue has always treated generation, transaction and distribution of power as separate revenue yielding activities and that it was only the income from generation of electricity which is entitled to deduction under section 80 IA of the Act. The CIT(A) also found that in the past the revenue applied the provisions of section 8....
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....easonable basis. In this regard he held that the reasonable rate of return prescribed by MERC would not be a reasonable basis on which profits of the eligible business can be computed under section 80 IA(8) of the Act. He held that reasonable rate of return is a hypothetical calculation of a percentage of capital employed. The same cannot be considered as income under the Income Tax Act. 33. With regard to the clear profit determined by the MERC order he held that the same is the book profit of the assessee on the basis of company law and is worked out after debiting Income tax and depreciation as per company law. If proper adjustment is made as per the Income tax Act then such profit would be around 334.72 crores. He held that even this profit cannot be assessed as income under the Act and for the very reason the same cannot be adopted as income for allowing deduction under section 80 IA of the Act. 34. The CIT(A) also held that the profits determined by the order of the MERC is the profit of the entire business of generation and distribution of power by the assessee and that it was only the activity of generation of power that was to be considered for deduction un....
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....onable return" from the combined activity of generation and distribution inMaharashtrahas been worked out at Rs.266 crore and Rs.210 Crore respectively by MERC. He pointed out that during the previous year the Assessee generated 2250 KWH million and 2073 KWH million from the Dahanu-1 and Dhanu-2 units respectively and purchased 3921 KWH Million from TPC for distributing power to its consumer in Mumbai suburb. The Assessee had paid Rs.1087,55,69,303 for purchase of power from TPC. The Assessee has taken Rs.27,73,673 per KWH million as transfer price to distribution division for its self generated power. The profit shown by these units for deduction under Sec.80-IA has accordingly worked out at Rs.255,25,33,002 and Rs.234,17,58,239. He pointed out that TPC is also a power generating company and the rate at which it has to sell power has been determined by MERC. The MERC has determined the profit of generation and distribution business in Mumbai Suburb for F.Y 2005-06 at Rs. 210 crore. Reasonable return of generating units can be computed on pro rata basis of self generated power and purchased power. Accordingly pro rata return for Dahanu 1 and Dahanu 2 will be Rs. 57 crore and Rs. 53....
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....CIT(A) and further relied on the order of the AO. 38. We have considered the rival submissions. We have already seen that the Assessee was distributing power prior to its commencing the business of generation and distribution of power. The activity of distribution of electricity was not entitled to the benefit of deduction u/s.80-IA(4) of the Act. In its business of distribution of electricity prior to its activity of generation and distribution of electricity, the Assessee was purchasing electricity from Tata Power Companies (TPC) and distributing it. After the commencement of generation of electricity at Dahanu, the Assessee continued to purchase electricity from TPC as the generation of electricity at Dahanu was only 500 MW whereas the supply in Mumbai region was more than 1200 MW. The Assessee did not sell the electricity that it generated at Dahanu to outsiders but utilized the entire generation in the existing business of distribution of electricity in Mumbai. The company in AY 2000-01 had computed the profit on generation of electricity at Dahanu by taking the average selling price realized from the consumers in Mumbai. The average price was arrived at by dividing the total....
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....ending, the matter was resolved between TPC and the company and a compromise was reached on the amount of standby charges. The tribunal in AY 2000-01 held that the amount finally settled between the company and TPC should be included for working out the average price paid to TPC and that should become the market value for computing profit of generation unit at Dahanu for the purpose of deduction u/s 80IA. The assessments in the later years was also completed on the same basis as the assessee company accepted the CIT(A) order on the issue of adopting price paid to TPC. Thus the amount on which the Assessee would be entitled to deduction u/s.80-IA(4) was thus determined in the assessment proceedings u/s.143(3) of the Act. 39. The question is whether that position has changed with the determination of tariff rates by the MERC. In exercise of powers conferred by the Electricity Act, 2003, MERC notified the Maharashtra Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulation, 2005 which superseded the MERC (Terms and Conditions of Tariff) Regulations, 2004. Under these regulations, it was mandatory for all power generation and distribution entities t....
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....accounts or as allowed to be computed for the purpose of tariff fixation will match with the Reasonable Return. The exercise of adjusting gap between the Reasonable Return and the profits i,e. clear profits is an ongoing process and the same is either allowed to be recovered from the consumers out of fixation of tariff for subsequent year or the tariff for the subsequent year is adjusted to take care of the excess gap. Thus Clear Profits which are in excess of the Reasonable Return does not cease to be the profit of the company but is only considered for fixing the Tariff for the subsequent year and in subsequent year the profits will be less on account of lower fixation or tariff and deduction u/s. 80IA will also be lower. The gap between the Clear Profit and Reasonable Return continue to remain with the company. d) Reasonable Return which is computed based on hypothetical figure of Capital Base which is adjusted on a year to year basis and which has no reference to the actual figures in the books of accounts is only an exercise for fixation of tariff. If the profits as per books of accounts are less than the Reasonable Return the deduction u/s. 80 IA cannot be granted on the amou....
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....ue considered the rates at which power was purchased by the Assessee from TPC as the market value. There is nothing brought on record to show as to how the rates, based on the determination of power tariffs by MERC, is the true market rate especially in the light of the reasons given by the Assessee as to why the said rates do not reflect the correct market rate if applied in the case of the Assessee. In the given facts and circumstances of the case, we are of the view that there is no reason to deviate from the mode of computation of profits eligible for deduction u/s.80-IA of the Act, as was done in the past. 43. We also do not agree with the conclusion of the AO that after the passing of the order by MERC, the determination of price of power purchased by the Assessee from TPC presents exceptional difficulties. The fixation of tariff by MERC undergoes several processes like public hearing of all interested parties and other stake holders. The AO has nothing to do with those processes. As far as the AO is concerned, the purchase price from TPC is the best yardstick as the transaction between the Assessee is at arms length between unrelated parties. 44. In the given....
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....ied as capital gains but should be treated as business income. 47. The Assessing Officer however treated the income from sale of units of mutual funds and securities as capital gain. 48. On appeal by the assessee the CIT(A) following the earlier orders of the Tribunal in assessee's own case held that the income in question has to be assessed as income from business. 50. After considering the rival submissions and perusing the relevant material on record we observe that this issue came up before the Tribunal in the immediately preceding year i.e. assessment year 2003-04. The relevant discussion has been made in para 8 of the order and it was finally held that the CIT(A) had correctly decided for considering such income as 'Business Income'. In the absence of any distinguishing features having been pointed out by the ld. D.R in this year vis-à-vis the earlier years, we uphold the impugned order on this issue. Ground No.5 about the deletion of expenses also stands consequently dismissed. 51. In the result , the appeal of the revenue is dismissed. ITA NO.4631/MUM/09: 52. Ground No.1 raised by the assessee relates to disallowance of expense....
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....nt Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (1) of Section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record; vii)The proceedings for Assessment Year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income / income from mutual funds which does not form part of the total income as contemplated under Section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circ....
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.... ---------------------- Total interest income Rs. 462,95,57,481  ....